Comprehensive At the beginning of 2013, Norris Company had a deferred tax liabil

Question

Comprehensive At the beginning of 2013, Norris Company had a deferred tax liability of $6,700, because of the use of MACRS depreciation for income tax purposes and units-of-production depreciation for financial reporting. The income tax rate is 30% for 2012 and 2013, but in 2012 Congress enacted a 40% tax rate for 2014 and future years. Norris's accounting records show the following pretax items of financial income for 2013: income from continuing operations, $129,000 (revenues of $365,000 and expenses of $236,000); gain on disposal of Division F, $25,300; extraordinary loss, $20,700; loss from operations of discontinued Division F, $8,000; and prior period adjustment, $15,000, due to an error that understated revenue in 2012. All of these items are taxable; however, financial depreciation for 2013 on assets related to continuing operations exceeds tax depreciation by $6,600. Norris had a retained earnings balance of $179,000 on January 1, 2013, and declared and paid cash dividends of $36,000 during 2013. Comprehensive At the beginning of 2013, Norris Company had a deferred tax liability of $6,700, because of the use of MACRS depreciation for income tax purposes and units-of-production depreciation for financial reporting. The income tax rate is 30% for 2012 and 2013, but in 2012 Congress enacted a 40% tax rate for 2014 and future years.

1. Prepare Norris's income tax journal entry at the end of 2013.

I'll need the following information that will go into a spreadsheet

Income Tax Expense

Gain on Disposal on Division F

Retained earnings

Deferred Tax Liability

Extraordinary Loss

Loss from Operations of Discontineued Division F

Income Taxes Payable

Explanation / Answer

Workings:

Accounting Income                                        140,600

Tax @30%      (b)                                                42,180

Difference adjusted to Defered tax liability        1,980

2. Balance in deferred tax liability after above adjustment = 6,700 - 1,980 = 4,720

This was made when the tax rate was 30%, in the future the tax rate will be 40% whihc will increase the liability for the company:

Tax @30 % = 4,720

Tax @ 40 % = 4,720*40/30 = 6,293.33

To bring the deferred tax liability to 6,293.33, we make the second journal entry

Journal entry to record income tax expense for 2013 Income tax expense Dr                 42,180 Deferred tax liability Dr                   1,980 To Taxes payable      44,160 Journal entry to adjust deferred tax liability to the changed rate Income tax expense Dr 1573.33 To Deferred tax liability 1573.33

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